Emission trading systems as an instrument in decarbonization strategies’ toolkit

Abstract

At the 2021 Conference of the Parties to the United Nations Framework Convention on Climate Change in Glasgow, many leading economies have cemented the intention of achieving carbon neutrality by mid-century (2050-2070). However, the geopolitical and economic crisis of 2022 threatens to reduce the priority of decarbonization policy and postpone the introduction of more restrictive measures. In the face of growing constraints, the choice of climate policy instruments becomes even more complex and important. It is necessary to analyze different options from the low-carbon development policy toolkit, to understand their strengths and weaknesses, and their potential to be used to build a comprehensive policy. This article analyzes the strengths and weaknesses of emissions trading systems (ETS) as a tool for direct carbon pricing - a measure that experts from international organizations, as well as the academic community, believe is essential for achieving climate goals. Despite the fact that carbon taxes (the second option of direct pricing) is easier to implement and administer, many jurisdictions still opt for an ETS. Several factors influence the choice of ETS as a decarbonization tool: if optimally designed, a market-based mechanism provides cost-effective emission reductions, there is potential for linkage into a larger systems, the flexibility of the instrument can also provide additional benefits, China’s national ETS is a good example of exploiting the ETS’ flexibility. Political and administrative characteristics (EU, Germany, UK, California), Kyoto, Brussels, and OECD effects (Mexico and other jurisdictions) play an important role in the choice in favour of ETS. The experience of complex and comprehensive low-carbon development strategies already being implemented shows that it is not necessary to place the ETS at the center, making it the cornerstone of policy. The role of ETS in the entire set of decarbonization measures can be central, supportive, or enabling. ETS can have different objectives and stimulate not only direct emission reductions, but also technological transformation, energy transition. For Russia as a federal state, conducting pilot projects with different instruments of carbon pricing implemented in different regions seems to be the best solution for the near future and finding the right instruments for the Low Greenhouse Gas Emissions Development Strategy.